Tuesday, May 27, 2008

Short Term Technical Rally/Bounce Back Possible

The Nifty, boosted by strong Asian cues, opened in the positive today and stayed so for the first half of the day. It was probably the weak European markets, though they have also recovered by now, on opening that triggered the fall in our markets. And the fall was strong enough to bring the Nifty down by 80-85 points from its highs, thus giving us the fourth consecutive day in the red.

Seen above is the 60 minutes chart of the Nifty. While, the downtrend is clearly visible with lower highs and lower lows in place, yet there are some short-term positives visible on this short term chart. First of all, the price has now reached the downward sloping trendline which has provided support to the prices 3-4 times since the last one month. Not only that, it also reversed from the line and has shown one blue candle at the end. If we concentrate on the price movements in the last two days, 26th and 27th, we can see that the price has been making lower lows while the Relative Strength Index (RSI) during the same period has been making higher lows, thus creating a positive divergence between the price and the RSI. The same has been emphasized with the downward and upward sloping arrows. Another positive which is not visible on this chart, but is there on the daily charts, is that the RSI has found support at 40 and has flattened at that level.

An upward move could find resistance near 4900 and above that it could go on upwards to 4935 which will confirm a short term uptrend. This uptrend could take the Nifty between 4990 and 5010. A move to these levels could be used as a shorting opportunity. I think taking naked short positions is a risky game which risk averse traders should not enter into, but low risk shorting opportunities like buying puts (one could go for 4800, 4700 or 4600 June puts) or bear call spreads (e.g. buying 5000 call and selling 4600 or 4500 June call) is definitely a good opportunity. For reference sake, the 4800, 4700 and 4600 puts were available for Rs.156, Rs.118 and Rs.88 respectively at the end of the day while the 5000, 4600 and 4500 calls were available for Rs.93, Rs.320 and Rs.395 respectively.

Once again, do not be tempted to take long positions if the market does go up tomorrow. It makes sense to create long positions only if 5070-5080 levels are broken on the upside.

Uma, a small time trader herself, writes about her trading experiences in the form of a personal stock diary on her blog and it happens to be a good read. Incidentally, she also left a link to my blog on her blog. Thank you, Uma.

Well, that’s all for today.

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!